Continued Developments in Private Debt Collection

Based on the resounding failure of past efforts at private debt collection of federal taxes chronicled by the National Taxpayer Advocate and others here, here, here, here, and here or perhaps based on the need for certain members of Congress to aid their constituents in the business of private debt collection discussed here and here, Congress revitalized IRC 6306 and enacted IRC 6307 on December 4, 2015 as part of the Fixing America’s Surface Transportation Act legislation requiring the IRS to once again use private debt collectors to collect accounts which the IRS has sitting on its shelf gathering dust. I described the bill in an earlier post. I will not again point out that over the past six plus years Congress has severely cut the IRS budget so that it does not have the resources to collect many of the accounts sitting on its shelf or to train its staff in how to appropriately collect that debt or that debt collection seems like an inherently governmental function which should not be privately sourced. Instead of rehashing what a bad idea this is, I will try in this post to talk about what is about to happen with respect to private debt collection.

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Although the IRS was supposed to start using private debt collectors by now, it has not been sitting on its hands over the past 14 months but has been moving to the reimplementation of private debt collectors (PDCs) as Congress required it to do. We should expect accounts to move into the hands of the PDCs within the next couple of months and the phones begin to light up as the PDC employees begin to contact the taxpayers whose accounts were turned over to them. The IRS just issued Publication 4518 which provides some information on what taxpayer should expect with the coming of the PDCs.

Distinguishing PDCs from Scam Artists

One of the biggest issues surrounding the use of PDCs this time around concerns the proliferation of scam artists in the past couple of years who have preyed on people scared of the IRS and willing to believe that the scam artist represented the IRS. So, the injection of a non-governmental player into the system has the potential to exacerbate the problem created by the scam artist. One of the big problems for the IRS in the roll out of the PDC program addresses the concerns that taxpayers will have when contacted by a PDC. The IRS has had its own employees questioned with respect to their authenticity. It will be interesting to see how this plays out. In its publication, the IRS addresses the problem by noting that it will send the taxpayer a letter advising the taxpayer their account has been assigned to a PDC and the PDC will send the taxpayer a letter confirming the assignment. This will allow the taxpayer, in theory, to be comfortable that the call from the PDC represents a legitimate call and not a scam. Two paragraphs in the publication address this issue:

What will the private collection agency do? The private collection agency assigned to your account is working on our behalf. They will send you a letter confirming assignment of your unpaid tax liability and then contact you to resolve your account. They will explain the various payment options and help you choose one that is best for you.

How can I be sure it is the private collection agency calling me? The private collection agency will send you a letter confirming assignment of your tax account. The letter will include the same unique taxpayer authentication number that is on the letter sent to you from the IRS. As part of the authentication process the PCA employee will use the unique number for identity verification. Keep both letters in a safe place for future reference.

Exclusion from Being Sent to PDCs

Moving past the issue of the authentication of the PDC, another issue facing the IRS as it assigns accounts to the PDC is which accounts should be assigned. The IRS created an initial list of ten types of accounts that would not be assigned to PDCs. This list can be found on its web site describing the program. The list does not need to stop with the ten types list on the web site and depends on how the IRS decides to assign accounts and what Congress intended the IRS to do. The answer to that question turns in part on how you view the authority of the IRS with respect to the creation of the PDCs. If you take the view that the IRS does not have inherent authority to hire PDCs and that its authority derives only from the statute, then you would look at the statute as the sole source of authority for choosing the accounts to go to the PDCs. Under this view, the IRS can only send to the PDCs the things specifically granted in the statute. The interpretation of the statute on this point seems to have created some disagreement within the IRS, with the National Taxpayer Advocate taking the view that the statute provides a narrow grant of authority, while others in the IRS or Chief Counsel take a more expansive view.

The statute uses the term ‘potentially collectable inventory’. What does that mean? Together with others led by Chi Chi Wu at the National Consumer Law Center, I argued that the term, not defined in the Code, should be interpreted to exclude the same types of taxpayers the IRS excludes from the Treasury offset program. This would exclude individuals on fixed income falling below 250% of poverty, which is a line used for other purposes in the Code including the cut off for services from low income taxpayer clinics. The IRS leadership was kind enough to give us a high level meeting to discuss this and other issues regarding PDCs but did not agree with our view on the statute. The IRS has continued to debate the IRS into the office of the Commissioner. At present it seems that the IRS will not send to PDCs cases that have already achieved the Currently Not Collectible (CNC) categorization because it considers these as closed cases. Everyone acknowledges that CNC cases can come out of that category and that the IRS can offset refunds to collect from cases in that category, but these cases will nonetheless not get sent to the PDCs – a decision that makes a lot of sense particularly when you consider that PDCs do not have the authority to place a case into CNC.

The Commissioner has also agreed to place a freeze on sending SSDI and SSI cases to the PDCs under the presumption that, even though a specific taxpayer receiving these payments may not yet have received the CNC designation, such a designation would likely occur if the IRS took a hard look at the case. The Commissioner’s decision may have little practical impact if the IRS does not have the programming to cull these cases from the ones sent to the PDCs. This is a big victory for consumers if the practical effect of IRS computer limitations does not totally undercut the decision. The Commissioner did not decide to exclude taxpayers receiving regular social security or railroad retirement payments from referral because those individuals might have assets that would lift them out of CNC. All cases pending in TAS will be excluded from referral and the National Taxpayer Advocate will likely issue an order that TAS will take any case in which the PDC seeks to collect from a taxpayer as she did the last time PDCs existed. The NTA has the power to create special designations of public policy cases that qualify for the services of her office as I have discussed in a prior post. Expect an order on this in the near future.

Voluntary Payments

Another issued presented by PDCs is how many times they can contact a taxpayer who does not have the ability to enter in an installment agreement but is willing to make a voluntary payment. Many taxpayers do their best to avoid paying the IRS anything, but a significant number of taxpayers who owe the IRS try hard to pay off the debt even in the face of significant financial odds. I spoke to a prospective client recently who owes the IRS about $2,000. Last year she only made $2,500 yet somehow she is on an installment agreement and makes a $25 a month payment. She called because she had a question on the offer in compromise form she could not answer. Her mother was willing to give her money that would satisfy almost half of the outstanding liability. I love her commitment to paying her taxes but I explained to her that with her financial situation we could make an offer for a much lower amount and that she could stop immediately making the monthly payments. She did not want to stop. That’s ok because that is her decision and what makes her feel right; however that attitude can be exploited.

Many others like my prospective client exist and the PDCs can obtain from them voluntary payments even though the individual falls into a hardship category and would not have to pay. The issue before the IRS concerns how many voluntary payments can the PDC solicit from one taxpayer. Keep in mind that the PDC gets paid for money it collects. So, it has an incentive to keep going back to the well for people who have demonstrated a willingness to make a voluntary payment. The PDCs, as mentioned above, do not have the ability to place the individual into CNC status, so they can just keep calling month after month or week after week or day after day trying to squeeze another voluntary payment out of the individual unable to enter into an installment agreement. Does the statute allow the IRS to authorize the PDCs to make multiple calls for voluntary payments or, put another way, does the statute require the IRS to limit the PDCs in the number of calls made for voluntary payments. Framing the question can drive the answer. The Commissioner has apparently decided that the PDCs can make one, but not multiple, request for a voluntary payment. This is a major victory for consumers because the calls can quickly become harassing if the PDCs have open season on these individuals.

Who are the PDCs

The IRS chose four PDCs. The PDCs selected are Conserve, Pioneer, Performant and CBE Group. One of these has recently been deselected by the Department of Education for apparently not following the rules for private debt collection of loans in a program administered by that department. PDCs do not have a good reputation in the world of consumer law. While that is natural and not unexpected, it means that taxpayers and their representatives should be looking out for practices that seem inappropriate. To make a complaint about a PDC call the Treasury Inspector General for Tax Administration (TIGTA) hotline at 800-366-4484 or write to www.tigta.gov. Like the IRS, PDCs are covered by the restrictions set out in IRC 6304 which I have discussed in prior posts here and here. Consumer advocates requested great restrictions and more openness regarding the policies and practices the PDCs would use in collecting but these requests were denied by the IRS.

Final Observations

I think PDC is a bad idea so I may be a bad person to comment about it. It will soon come again. Understanding how it works will help you in advising clients who may have grown complacent as the IRS ability to reach delinquent taxpayers has diminished over the past several years. While I hope it works, my expectations remain quite low.

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Comments

This is just a boondoggle for political favors. With privacy concerns regarding taxes this is an inherently governmental job. Tremendous IRS resources are diverted to train and equip the private collectors. When an agencies resources are stripped, it makes no sense to then complain they are not keeping up with the collection of taxes so we will privatize this function and drain more agency resources to implement the program, train the PDC staff, and provide them computers and facilities to conduct private collection. Not to mention the potential for abusive collection practices. And the IRS will be charged with monitoring the program. IRS is very capable when properly staffed.

Your several links to “the resounding failure” of debt collection are all to hostile people saying why they think the program *will* fail, not to actual failures. I imagine it must have actually failed, since they stopped doing it, though, and I’m curious why. Are there any links to what failed in it?

The idea makes perfect sense to an economist like myself, though it may well be because I don’t know the details that owuld mess up private collection. THe IRS is underbudgeted, so they shoudl farm out debts they don’t have the resources to collect. Private companies do this all the time. Of course, the IRS has greater power than a private debt collector, so it might be cheaper for them to do the collection if they had the budget, but they don’t.

It will fail for the same reasons it has failed miserably twice before. There are no changes other than new liabilities and new collection firms. The debts that will be assigned to the PDC’s are low dollar, very low priority cases where there has been no contact for a prolonged time. The PDC’s cannot levy and cannot seize. They can only request that you send in payments. Why would anyone that hasn’t paid their taxes already respond positively to someone with no enforcement powers? Answer…they will not.

You’ve penned another excellent post, Keith. I share your skepticism about the potential disaster that the IRS’s upcoming use of PDCs will pose. I can only imagine the hay that IRS impersonators will be able to make out of PDCs and the confusion and mistrust that contacts from PDCs will engender among taxpayers. What could possibly go wrong with the use of PDCs?? Everything!

Why speak to them other than to calm down a nervous client? The PDC’s can’t do anything. They can take a payment agreement and have zero enforcement powers. Advise any client contacted by a PDC to refer them to call you and hang up.

IRC 6303, as noted below, defines the qualified tax colletion contract and what their role will be. Based upon this language, which doesn’t appear to give the contractor any ability to enforce collections, my question is WHY anyone would co-operate (and even speak with) the third party collectors?? (I know what my advice to my clients will be….) This certainly doesn’t appear to be a recipe for success!

(b) Qualified tax collection contractFor purposes of this section, the term “qualified tax collection contract” means any contract which—
(1) is for the services of any person (other than an officer or employee of the Treasury Department)—
(A) to locate and contact any taxpayer specified by the Secretary,
(B) to request full payment from such taxpayer of an amount of Federal tax specified by the Secretary and, if such request cannot be met by the taxpayer, to offer the taxpayer an installment agreement providing for full payment of such amount during a period not to exceed 5 years, and
(C) to obtain financial information specified by the Secretary with respect to such taxpayer,

I agree completely. The program is foolish. If Congress wants IRS to collect more, give the IRS more resources. Otherwise, they’ll be writing off more liabilities as uncollectible and ultimately letting them go as statutes expire.

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Leslie Book

Keith Fogg

T. Keith Fogg is a Clinical Professor of Law at Harvard Law School where he started a tax clinic in 2015. Prior to joining the faculty at Harvard, he began his academic career at Villanova Law School in 2007 after working for over 30 years with the Office of Chief Counsel, IRS. Read More…

Christine Speidel

Christine Speidel is Assistant Professor and Director of the Federal Tax Clinic at Villanova University Charles Widger School of Law. Prior to her appointment at Villanova she practiced law at Vermont Legal Aid, Inc. At Vermont Legal Aid Christine directed the Vermont Low-Income Taxpayer Clinic and was a staff attorney for Vermont Legal Aid's Office of the Health Care Advocate. Read More…

Stephen Olsen

Contributors

Carlton Smith

Carlton M. Smith worked (as an associate and partner) at Roberts & Holland LLP in Manhattan from 1983-1999. From 2003 to 2013, he was the Director of the Cardozo School of Law tax clinic. In his retirement, he volunteers with the tax clinic at Harvard, where he will be Acting Director from January to June 2019. Read More…

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Samantha Galvin

Samantha Galvin is an Assistant Professor of the Practice of Taxation and the Assistant Director of the Low Income Taxpayer Clinic (LITC) at the University of Denver. Professor Galvin has been teaching full-time at the University of Denver since October of 2013 and teaches courses in tax controversy representation, individual income tax, and tax research and writing. In the LITC, she teaches, supervises and assists students representing low income taxpayers with controversy and collection issues. Read More…

William Schmidt

William Schmidt joined Kansas Legal Services in 2016 to manage cases for the Kansas Low Income Taxpayer Clinic and became Clinic Director January 2017. Previously, he worked on pro bono tax cases for the Kansas City Tax Clinic, the Legal Aid of Western Missouri Low Income Taxpayer Clinic and the Kansas Low Income Taxpayer Clinic. He records and edits a tax podcast called Tax Justice Warriors. Read More…

Caleb Smith

Caleb Smith is Visiting Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today. Read More…

Patrick Thomas

Patrick W. Thomas is the founding director of Notre Dame Law School’s Tax Clinic, in which he trains and supervises law students representing low-income clients in disputes with the Internal Revenue Service. Prior to joining the law school faculty in 2016, he received an ABA Tax Section Public Service Fellowship to work as a staff attorney for the LITC at the Neighborhood Christian Legal Clinic in Indianapolis. Read More…

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